Income investing stock Volta Finance cash flows at near-record levels (LON:VTA)

Volta Finance Ltd (LON:VTA) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.

Q1: Your recent report sits behind a disclaimer. What can you tell us about that?

A1: It is just the standard disclaimer that many investment companies have. In essence, for regulatory reasons, there are some countries (like the US) where the report should not be read. In the UK, because CLOs are not a simple asset class, the report should be looked at only by professional/qualified investors.

Q2: You called your recent piece, Cash is king and the king is rocking and rolling. What can you tell us about it?

A2: Volta Finance is no different from any other investment company in that it identifies when the market has mispriced long-term cashflows. In this note, we examined its success in that current cashflows are at near-record levels and 2.7x the dividend payment. Looking forward, we reviewed why defaults may not rise to the level now built into loan prices – a view consistent with that of rating agencies and Volta – as well as the risks to this position. We noted that the current level of inflation is positive, as long as it is not sustained for too long. We also highlight their diversification and geographical exposure. Bearing in mind these issues, the discount is anomalous.

Q3: So, taking your first point first, what can you tell us about the higher cashflows?

A3: In several of our recent notes, we have highlighted how the market opportunities have allowed CLO vehicles to refinance their own debt instruments, while the assets (corporate debts) have not re-financed. This means that the profits of CLO structures increased, and so the cashflows to CLO equity holders have increased. As the holder of CLO equity instruments, their cashflows improved. We included a chart showing the annualised interest and coupon cashflow receipts received by them. The latest figure, as of August, is 21.1% of NAV, against a target dividend of 8% of NAV, showing that not only is the dividend very well-covered but that, on a cash-only basis, NAV growth would be expected. Historically, in non-crisis years, a yield of ca.12%-13% through cycle would be more normal.

Q4: What about inflation, and higher interest rates, and the resilience of cashflows going forward?

A4: The manager’s comment was “Inflation is our Friend”, as broadly spread inflation helps erode debt, as borrowers’ EBITDA continues to grow, and VTA’s debt is floating rate. Sharp rate rises can be problematic, but the starting position for corporates is very positive, with profits up 31% in 4Q’21 on 4Q’19, while corporate debt is up 15% over the same period. Corporate defaults are presently extremely low. Our note goes into detail of how the growing preponderance of well-financed private equity (PE) backing and covenant-light document should help. They have incrementally reduced risk with its diversification and will see upside on re-investment. Now, so far, I have only painted the positives, and, of course, things will get worse from here. The question is by how much. The market is pricing in, to Volta to quote Fraser from Dad’s Army “We’re Doomed”, when, as of today, the most probable outcome is that defaults will rise from around 0.6%/0.7% to probably 3% in Europe, and lower in the US. If that is the actual outturn, the probability is a sharp recovery in Volta Finance’s NAV and discount.

Q5: And what about the risk?

A5: Of course there are risks. The last few days/ weeks show how volatile markets can be. There is a macro risk to the downside, and sentiment is always hard to call. The key question is how much is in the price.

Click to view all articles for the EPIC:
Or click to view the full company profile:
Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
Volta Finance

More articles like this

Volta Finance

Mortgage-Backed Securities and Collateralized Mortgage Obligations

Mortgage-backed securities (MBS) are debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property. Mortgage loans are purchased from banks, mortgage companies, and other originators and then assembled into

Volta Finance

CLO prices edge higher

Prices for the highest-rated bonds backed by leveraged loans are creeping higher in trading markets, signaling that at least some investors are snatching up securities they see as cheap, and the debt may rally further.   Collateralized loan

Volta Finance

How do collateralized loan obligations work?

Understanding CLO Collateral: Leveraged Loans A portfolio of loans act as the collateral supporting a CLO. The proceeds of these loans are typically used by non-investment grade borrowers to support a range of activities, including mergers and acquisitions,

Volta Finance

Demystifying collateralized loan obligations

What Is a Collateralized Loan Obligation? A collateralized loan obligation (CLO) is a portfolio of predominantly senior secured loans that is securitized and actively managed. Each CLO issues a series of floating rate bonds, along with a first-loss equity tranche.

Volta Finance

Collateralised loan obligations explained

Against a backdrop of geopolitical and economic volatility, collateralised loan obligations (CLOs) continue to navigate uncertainty and hold net asset values. Collateralised loan obligations (CLOs) sit at the pinnacle of various financial processes, in terms of both their

Volta Finance

What is the difference between a CDO and a CLO?

Many who followed the 2008 financial crisis closely would know about CDO (collateralized debt obligations). They were a major reason triggering the financial crises. There is another similar term, CLO (collateralized loan obligations), and many people do get confused

Volta Finance

CLOs: Uncover opportunity beyond AAAs

Collateralized loan obligations (CLOs), which are securitized pools of leveraged loans, may provide several attractive benefits within an income-oriented portfolio, including enhanced yields, structural risk protections and diversification. We believe CLOs are particularly attractive in today’s rising rate environment. They

Volta Finance

Mortgage Investment

Mortgage Investment means a direct or indirect interest in a tax-exempt mortgage revenue Bond secured by a Property, including residual interests in one or more trusts which hold tax-exempt mortgage revenue Bonds, and any other loan (whether or not

Volta Finance

Collateralized Loan Obligations (CLO)

Collateralized loan obligations (CLOs) are loans that are repackaged and bought by investors. These securities are backed by a pool of loans comparable to collateralized mortgage obligations (CMOs). With CLOs, the underlying debt is loans, as opposed to

Volta Finance

The U.S. leveraged loan market

Broadly syndicated loans to non-investment grade U.S. Corporations (“leveraged loans”) are widely misunderstood. A number of commentators imply that leveraged loans are shadowy corporate equivalents to pre-crisis sub-prime mortgages. We do not believe this to be true and

Volta Finance

CLOs: Lower duration risk and pick up yield

With higher relative yields, a history of strong risk-adjusted returns, and protection against rising rates, there is a strong case for a strategic allocation to collateralized loan obligations (CLOs) within an income portfolio. In the upcoming webcast, CLOs: Lower

Volta Finance

A look at leveraged loans and CLOs

Chris Galipeau, Senior Market Strategist of Putnam’s Capital Market Strategies group, recently spoke with Scott M. D’Orsi, CFA, a Portfolio Manager in Putnam’s Fixed Income group on the Active Insights podcast. Scott has been in the investment industry

Volta Finance

Why invest in CLOs?

CLOs have historically offered a compelling combination of above-average yield, strong risk profiles, and the potential for strong upside appreciation. Over the long term, collateralized loan obligation (CLO) tranches have historically performed well relative to other corporate debt categories, including

No more posts to show